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A share is a share in the share capital of a company and includes stock except where a distinction between stock and

share is expressed or implied. A share signifies the interest of a shareholder in the company, the right to receive dividends, to attend its meetings and vote at the meeting, and to have share in the surplus assets of the company, if any, in the event of the company being wound up.

Whil the ter hare represents the pr pert , the ter share ertifi ate, n the ther hand, represents the evidence f the title f the ember t such pr pert . The share capital f a company is divided into a number of indivisible units of a specified amount. each of such units is referred to as a share.

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The term stock may be described as the aggregate (total) of the entire fully paid up shares of a company, owned by an individual, merged into one fund of the equal value. That is, it represents the set of the entire shares of the company, owned by an individual, put in one single bundle. Further, the stock is expressed in terms of money, and not in terms of so many shares. The stock may, thus, be divided into fractions of any amount and such fraction of the amount may be transferred like shares. Such fractions, unlike the shares, bear no distinctive numbers. But a company cannot an original issue of its stocks.

Share capital comprises two types of shares: (a ) Equity Shares (these are also known as Ordinary Shares) Preference Shares

(b)

There are the following types of equity shares: (i) (ii) (iii) With voting rights Without voting rights With differential rights regarding the payment of dividend, voting or otherwise, according to such rules, and subjects to such conditions, as may be prescribed. Shares with differential voting rights, including non-voting shares, cannot exceed 25 per cent of the total issued share capital

The equity (or ordinary) shareholders of a Company are virtually (or notionally) the owners of the Company. (The debenture holders, however, are the creditors to the Company).

Authorised capital is the maximum amount up to the face value of which the Company concerned has been authorised to issue shares (including both the equity and preference shares). While computing the amount of the authorised capital, only the face value of the shares is to be taken into account, and not the amount of the premium at which the shares had been issued. Further, the amount (only the face value) of the bonus shares issued, by capitalising the general reserves, will also be taken into account.

Authorised capital is the maximum amount up to the face value of which the Company concerned has been authorised to issue shares (including both the equity and preference shares). While computing the amount of the authorised capital, only the face value of the shares is to be taken into account, and not the amount of the premium at which the shares had been issued. Further, the amount (only the face value) of the bonus shares issued, by capitalising the general reserves, will also be taken into account.

Issued capital is the amount of the aggregate face value of the Companys shares, for which the shares have been issued (that is, offered) for subscription by the general public, or by private placement. The amount, up to which the shares have been actually applied for by the investors, is known as the subscribed capital.

Paid-up capital is the amount paid along with the application (known as application money) and/or subsequently by way of call money on first, second and final calls. Par Value is the amount written on the face of the share scrip, also known as the face value. Book value of the shares is the value of each share, plus the aggregate amount of the entire Reserves and Surpluses, as per the books of the Company, as all these belong exclusively to the equity shareholders, alone. Thus, the book value of each share, in percentage terms, would be equal to:
(Fully Paid-up) Equity Share Capital + Reserves + Surpluses x 100 Aggregate face value of such Shares

The amount at which the shares are offered to the public, to subscribe thereto, is known as the issue price. Usually, the new Companies come out with their first public issue at par value or face value. The shares are said to have been issued at par when the subscribers to the shares of the company are required to pay only the amount equivalent to the nominal value (face value) of the shares issued. The shares are said to have been issued at a premium, when the subscribers to the shares of the company are required to pay the amount higher than the nominal value (face value) of the shares issued.

The ct does not stipulate any restrictions or conditions on the issue of shares by the company at a premium. But the act has imposed the following restrictions on the use of the premium amount so collected: (i)The amount of premium cannot to accounted for as the profit of the company. ccordingly, it cannot be distributed as dividends. (ii)The amount of premium received should be kept in a separate bank account termed as the Share Premium ccount or the Securities Premium ccount of the company. Here, it must be noted that the mendment ct 1999 has since substitute the words Share Premium ccount with the words Securities Premium ccount.

(iii)The amount of securities premium should be kept with the same sanctity as the share capital is kept. (iv)The amount credited to the Securities Premium ccount cannot be treated as the free reserves of the company, as it is in the nature of a capital reserve.

The shares are said to have been issued at a discount, when the subscribers to the shares of the company are required to pay the amount lesser than the nominal value (face value) of the shares issued.

Sweat equity share means the equity shares issued by the company to its employees or directors at a discount or for consideration other than cash. Sweat equity shares may also be issued for providing knowhow or making available intellectual property rights (like patents) or value additions, by whatever name called.

Employee stock option means the potion given to the whole-time directors, officers, or employees of the company, giving them the rights or benefits of to purchase or subscribe to the shares at a future date, the securities (shares) offered by the company at a predetermined price.

Employee Stock Purchase Scheme [ESPS] (a)Eligibility to Participate in the Scheme (ESPS)
(i) n employee shall be eligible to participate in the scheme (ESPS).

(aa)Non-Eligibility to Participate in the Scheme(ESPS)


(i) n employee who is a promoter or who belongs to the promoter group shall not be eligible to participate in the scheme (ESPS). (ii) director who, either by himself or through his relatives or through any body corporate, directly or indirectly, holds more than 10 per cent of the outstanding equity shares of the company shall not be eligible to participate in the scheme (ESPS).

Employee Stock Purchase Scheme [ESPS] (b) pproval of Shareholders.

(c) Pricing and Lock-in Period. (d) Disclosure and ccounting Policy.

(e) Diluted earnings per share (EPS) pursuant to (as a result of) the issuance of the shares under the ESPS. (f) The consideration received against the issuance of the shares under the ESPS.

A company may, if so provided in its Articles of Association, capitalise its profits by issuing fully paid up shares to the members (shareholders), and thereby transferring the sums capitalised from the companys Profit and Loss Account or its General Reserve Account, to its share capital. Such shares are referred to as bonus shares.

These are issued to the existing shareholders of the company whose names appear in the Register of the company on the record date, as announced earlier to the actual issue of the bonus shares. If the authorised capital of a company falls short of the total amount of shares, after the issue of the bonus shares, it may announce the ratio of the bonus shares as also the record date, but the actual allotment of the bonus shares will be kept pending by the company till the date the authorised capital of the company is raised to the sufficient higher amount.

The price at which a share is quoted and traded in the stock exchanges (BSE, NSE, etc.) is known as its market price or market value. But, such market price may be said to be reliable enough, only if the shares are being actually traded daily, or at least frequently, as also in reasonably large volumes.

The issue of shares to the members of the public through a prospectus is known as the public issue. The sale of shares to only a few investors is known as private placement. Such issues do not require the issuance of the formal prospectus nor any underwriting arrangements. Besides, the terms of the issue are also determined through negotiation between the parties, viz. the issuing Company and the investing Company (ies) or individuals.

The fresh share issued only and exclusively to the existing shareholders of the Company (as per its register, as on a specified record date) on the rights basis, is known as the rights issue. The existing shareholders are given the right to apply for a specified number of shares, in proportion to their existing holdings of shares, on pro-rata basis. They also have the option of applying for additional number of shares, over and above the number of shares offered to them on the rights basis.

The composite application form comprises four pages, divided into four segments, marked Parts A, B, C, and D, on one separate page each. Part A is meant for the existing share holders only, for accepting and applying for the shares offered, or even for additional shares. Part B is meant for the existing share holder, for selling the Rights offered to him, to a third party. Part C is to be used by the Renouncee (i.e. the person to whom the existing shareholder has sold his Rights Offer) to apply for the Rights Shares. Part D is in the nature of a split form, to be used by the existing shareholder, to request the company to send fresh application form, whereby he may apply for a portion of the rights shares offered, and the balance rights shares offered, he can sell to a third party.

When the shares are issued by way of public issue, rights issue or on private placement basis, and the shares applied for are allotted by the issuing company to the investors, it is know to have been purchased or obtained from the primary market. And later, when such original primary investors want to sell their shares to some one else, in the stock exchange, through a broker (or even on personal basis to their friends and/or relatives, etc.) such sales and purchases are known to have been transacted in the secondary market.

Preference share capital can well be said to be a twoin-one instrument, a synthesis of the main features of both the equity shares and debentures. Different types of preference shares are: Cumulative and Non-Cumulative Callable and Non-Callable Convertible and Non-Convertible Redeemable and Non-Redeemable Cumulative Convertible Preference (CCP) Shares Participating and Non-Participating

Preference shareholders are entitled to vote only on the resolution placed before the Company under any one or all of the under noted circumstances. These are: (i)If the dividend(s) on preference shares are in arrear for the last two years or more, in the case of cumulative preference shares, or (ii)If the preference dividends have not been paid for two or more consecutive years in the past, or for an aggregate period of three years or more, in the preceding six years, ending with the expiry of the immediately preceding financial year (of the Company).

The Reserves comprise that portion of the net profit which has not been distributed as dividend to the share-holders, but is, instead, ploughed back in the business. Reserves may broadly be categorised under two heads: i. Revenue Reserves, and ii. Capital Reserves.

The Reserves comprise that portion of the net profit which has not been distributed as dividend to the share-holders, but is, instead, ploughed back in the business. Reserves may broadly be categorised under two heads: i.Revenue Reserves- comprise such reserves, which are constituted out of the revenue or income, generated out of the normal or usual line of business of the company. ii.Capital Reserves- the income generated from the sources, other than the usual business activity of the company, will go to constitute Capital Reserves.

The revaluation of assets takes place generally under the following three conditions: (a) On conversion of a Private Company into a Public Company. (b) At the time of amalgamation of two or more Companies. (c) When a Company is being sold out to another party/business house. The revaluation of assets is computed as: Revised value of the Fixed Assets [less] their Book Value = the amount of the Revaluation Reserve.

Statutory Reserves are such reserves which have been created, as per the statutory obligations. Surplus is the balance amount of the entire retained earnings which has not been earmarked for any specific expenditure. That is, after allocating the amount of retained earnings to the various items of Revenue Reserves and Capital Reserves, the amount still remaining, in balance, is know as the Surplus.

A private or public company, limited by shares, or a company limited by guarantee having a share capital, could not buy back its own shares earlier. However, the Companies (Amendment) Act 1999, under Sections 77A, 77AA and 77B , as also the guidelines issued by SEBI in this respect, has since allowed the companies to purchase their own shares or other securities, but subject to certain condition.

The loan backed up by the charge on some of the borrowers tangible assets, in favour of the creditor, is known as the Secured Loan. Such charge is created by way of pledge and/or hypothecation (in respect of movable assets like the inventories, receivables and movable items of machinery) and/or mortgage, (usually equitable mortgage) of immovable assets like land and building, plant and immovable items of machinery (imbedded to earth), etc.

As against the equity shareholders, who are considered to be the owners of the Company, (though notionally only), the debenture holders are considered to be the Companys creditors. That is, while the share capital is the owners equity, the debenture capital is like the funds lent to the Company at an agreed rate of interest, and repayable after the stated and agreed period, say, after the expiry of the 6th, 7th and 8th year, from the date of allotment, in the ratio of say, 35%, 35%, and 30%, respectively. Thus, the debentures are usually issued for raising long-term debts.

There are, generally, three main types of debentures on the basis of their convertibility (or otherwise) into equity shares. They are: (a)Fully Convertible Debentures (FCDs), [Here, the entire amount is converted into equity shares]. (b)Partly Convertible Debentures (PCDs), [Here, while one portion is converted into equity shares, the balance amount is paid back after the stipulated periods]. (c)Non-Convertible Debentures (NCDs) [Such debentures are not converted into equity shares at any stage, and are, accordingly fully redeemed after the stipulated period].

In view of the fact that the stamp duty, exigible on the documents pertaining to an equitable mortgage is nominal, (in that these are required to be stamped only as a simple agreement), usually only such (equitable) mortgage is created. The registered mortgage, however, is required to be stamped ad valorem (i.e., according to the value of the document the debenture deed), which may come to a very huge amount. Besides, as equitable mortgage executive by the companies can be got registered with the Registrar of Companies, it has the effect of having a public notice, like in the case of the registered mortgage.

As against secured loans, the unsecured loans are such loans against which no tangible security has been charged to the bank or to the financial institution or, to any of the creditors, like the promoters of the company or their friends and relatives, etc.

The power to borrow, whether express or implied, includes the power to charge the assets of the company as a security against secured advances (borrowings) to the lenders of the money. Most of the companies expressly make provisions for such borrowing power in the Memorandum of Association.

The Memorandum of Association authorises the company to borrow, the Articles of Association provides for the method as to how to borrow money, and by whom such powers will be exercised. It may also fix the maximum amount that can be borrowed by the company. The maximum amount to be borrowed, may be enhanced, if such need arises, by getting a special resolution passed to this effect.

But a public company cannot borrow any amount unless it has been issued the certificate to commence business from the Registrar of Companies, in addition to the certificate of incorporation (from the Registrar of Companies). [(Section 149(1)]. A private company, however, can borrow immediately after securing the certificate of incorporation from the Registrar of Companies.

This irregularity can be ratified and rendered valid by the company, by obtaining the required approval of the shareholders in the general body meeting. However, even if the company refuses to ratify the action of the directors, in obtaining the excess loan, the doctrine of in-door management shall protect a lender, provided he (lender) can establish that he had advanced the money in good faith. The company may , in turn, prefer to proceed against the directors and claim indemnity.

A company, which has power to borrow money, is also empowered to charge its assets to the lender, but subject to any limitation in its Memorandum of Association and the Articles of Association. Even the uncalled capital may be charged, but for this purpose the Articles of Association of the company must give the powers, and there must be nothing in the Memorandum of Association of the company to the contrary.

Moreover, the following charges must necessarily be registered with the Registrar of Companies within 30 days after the date of their creation: (i) A charge for the purpose of securing any issue of debentures (ii) A charge on uncalled share capital of the company (iii) A charge on any immovable property of the company, like its land and building, plant and machinery embedded to earth

(iv) A charge on any book debt of the company

(v)

A charge, not being a pledge, on any movable property of the company, [But it may be noted in this regard that the Act does not prohibit the registration of the charge created even by way of even pledge]

(vi) A floating charge (known as the charge by way of hypothecation) on the undertaking (company) or any property of the company, including stock in trade (i.e. its raw materials, work in-process, finished goods and consumable stores and spares)

(vii)A charge on the call made on the partly paid shares, but not paid after being called (i.e. asking the shareholders to deposit the next installment on the partly paid shares when due) (viii)A charge on a ship, or any share in the ship (ix)A charge on goodwill, or a patent or a license under a patent, or a trade mark or a license under a trade mark, or a copy right or a license under a copy right

However, the Registrar of Companies may allow the registration of a charge within the next 30 days, after the expiry of the first 30 days allowed, as aforementioned, but on the payment of a specified additional fee, provided the company is able to satisfy the Registrar of Companies that it had sufficient cause for not filing the required particulars or instruments (documents) and so on, within the initial specified period of 30 days.

It is the duty of the company to send the required particulars or instruments (documents), as abovementioned, to the Registrar of Companies for the purpose of the registration of the charge within the stipulated 30 days of the creation of the charge in question. But then, even the creditors can send the required particulars or instruments (documents), as abovementioned, to the Registrar of Companies for the purpose of the registration of the charge within the stipulated 30 days of the creation of the charge in question. In such cases, the creditors can recover the registration charges, paid by them, from the company[Section 134].

In the cases where the charge has not been registered with the Registrar of Companies, within the prescribe period of 30 days from the date of its creation, it will have the following effects (legal ramifications):
(i) The charge becomes void, against the liquidator and any creditor of the company. However, the charge shall not be void against a purchaser of the property charged. (ii) The debt, in respect of which the charge has been created, always remains valid. But it can be recovered only as an unsecured loan, and not as a secured loan. (iii) The money secured thereby becomes payable immediately. (iv) The company and every officer responsible may be subjected to a penalty up to Rs 500 for every day during which the default continues.

In the cases where any charge on any property of a company, which is required to be registered, has been so registered, as required, any person, acquiring such property of the company, or any part thereof, or any share or interest therein, shall be deemed to be having the notice of the charge as from the date of such registration with the Registrar of Companies.

The egistrar of ompanies will arrange to keep a register in respect of each company, containing all the charges requiring registration, in respect of that company at one place to facilitate the search in the respective register(s) on payment of the required fees for the search.

The following particulars will be recorded in the register: (i) The date of creation of the charge (ii) The amount secured by the charge (iii) rief particulars of the property charged (iv) The persons entitled to the charge

In the case of the charge in regard to the debentures, keeping in view the benefits that a series of the debenture holders are entitled to, the following particulars must be registered: (i) The aggregate (total) amount secured by the whole series of debentures (ii) The dates of the resolutions authorising the issue of the series of debentures, and the date of respective covering debenture deed, if any, by which the security is created or defined

(iii) A general description of the property charged (iv) The name of he trustees, if any, of the debenture holders (v) The amount or rate percentage (percentage of rate) of the commission or discount, if any, paid to any person subscribing or procuring subscriptions for any debentures of the company [Sectio s 28 and 2 .

The register so kept by the egistrar of ompanies shall be open for inspection by any person on payment of the fee prescribed for every inspection. The charge created by the company, created by way of an equitable mortgage in favour of the creditors, is also required to be registered with the egistrar of ompany, which has the effect of a public notice of the charge so created by the company.

The egistrar of ompanies issues a certificate of registration of any charge registered with him, under his signature, stating the amount secured thereby. uch certificate will serve as a conclusive evidence and proof that the requirements of the Act, in regard to the registration of the charges, have been completed and complied with.

Whenever the terms or conditions, or the extent or operation, of any charge, registered with the egistrar of ompanies, are modified, it shall be the duty of the company to send to the egistrar of ompanies, the particulars of such modifications days. The particulars of modification are within required to be filed in orm . urther, a charge may be filed by the company or by any of the persons interested in the charge. ut then, the modification of a charge can be filed only by the company, and none else.

The term modification includes variation (change) of any of the terms of the agreement, including the variation in the rate of interest, which may be by mutual agreement or by the operation of law. Even in the case where the rights of the charge holder are assigned to a third party, it will be regarded as a modification. Similarly, partial release of the charge on a particular asset or property, shall amount to the modification of the charge.

On payment or satisfaction of any charge, in full, the company must notify this fact to the Registrar of Companies within 30 days from the date of such payment or satisfaction. The Registrar of Companies, on receipt of such intimation from the company, shall arrange to send a notice to the holder of the charge in question, calling upon him to show cause within a time period specified in such notice (but not exceeding 14 days), as to why the payment or satisfaction should not be recorded in the Register of Charges, as intimated by the company to him (Registrar).

And if no cause is shown, the Registrar of Companies shall order that a memorandum of satisfaction shall be entered in the Register of Charges. But if the cause is shown, the Registrar of Companies shall record a note to that effect in Register of Charges memorandum of satisfaction, even if no intimation has been received by him from the company, on getting evidence to his satisfaction that any registered charge has been satisfied in whole or in part.

In the case where the Registrar of Companies enters a memorandum of satisfaction, as aforementioned, he shall furnish the company with a copy of the memorandum of satisfaction. The Company Law Board has the power to extend the time for the registration of the charge or to order that the omission or misstatement in the register of charges be rectified.

Every company must keep, at its registered office, a register of charges and enter therein all the charges specifically affecting the property of the company, and all the floating charges on the undertaking, or on any property of the company giving in each case the following details: (a) (b) (c) A short description of the property charged, The amount of the charge, and The names of the persons entitled to the c charge.

If any officer of the company knowingly omits or willfully authorises or permits the omission of any of the aforementioned entries, he shall be punishable with a fine which may extend to Rs 5,000.

As against pledge, in which case the charge is specific and fixed (i.e. it relates to only those specific items of goods actually pledged), the charge of hypothecation is in the nature of a floating charge, in that all the goods that are stored and stocked in the companys godown(s) or factory premises, etc., or even in transit, automatically get charged (hypothecated) to the creditors like banks, and the moment these stocks are taken out of the companys godowns, factory premises, etc., and/or from the possession of the company, such goods automatically get released, and are, accordingly, deemed to be out of the charge (of hypothecation) of the creditors like banks, too.

Thus, the various items of the goods keep going out and fresh items of the goods keep coming in, and the moment such goods come in, these get automatically charged, by way of hypothecation, to the creditors like banks. Similarly, the moment these goods go out of the possession of the company, these also get out of the hypothecation charge of the creditors like banks, simultaneously. Thus, as the actual (specific) stocks of goods, this way, keep changing and are turned-over, the charge of hypothecation is referred to as the floating charge, an ever-changing charge, over the ever-changing items of goods and stocks.

In the case of the goods pledged against advances, the pledgee has the lawful right to sell the goods pledged, without obtaining specific prior permission of the Court, in the event of the pledgor failing to pay the debt, in time. Thus, in the case of pledge, the pledgee can sell the goods pledged, after giving a reasonable notice of such intended sale to the pledgor. The pledgor, however, in turn, has the right to redeem.

But, as against this, in the case of hypothecated goods, these cannot be sold off, to recover the outstanding in the loan account, without prior specific written order of a competent Court, on this behalf. The sale of the hypothecated goods, without the Court permission, may, however, become possible and permissible, provided the charge of hypothecation itself is got converted into the charge of pledge, instead, by the simple act of the delivery of a pledge letter, duly signed by the borrower concerned, to this effect.

But then, a defaulting and recalcitrant borrower may usually be most unwilling to sign such letter of pledge, so as to convert the charge of hypothecation into that of pledge, inasmuch as this is, obviously, going to be against his own interest.

In such cases, however, some prudent and pragmatic creditors like banks, if we may say so, have acted smartly (or have over-acted, oversmartly) by forcing the borrower, under coercion, to per force sign the letter of pledge, knowing full well that an agreement, signed under pressure, or threat makes such an agreement as voidable (not void ab initio), i.e., at the option of the party whose consent was so caused. But then, such agreement may turn, and be treated as void, only and only after it is proved to have been obtained under coercion (i.e., under threat and/or undue influence).

As per the provisions of law, the charge of pledge, created subsequently, after the creation of the charge of hypothecation, may have the priority and preference thereto (though created afterwards) provided, of course, the pledgee did not have the knowledge and notice of the prior charge of hypothecation.

The charge of hypothecation of stocks of inventories and book debts [as also of equitable mortgage, created by the deposit of the title deed (usually in original) of the immovable property charged] must be registered with the Registrar of Companies, within 30 days from the date of the creation of the charge. The application, along with the relative legal agreement document, needs to be filed in the office of the Registrar of Companies concerned. Such application can, however, be filed either by the borrower or by the creditor (banker) concerned.

Such registered charges may as well be got vacated, but such application, for the vacation of the registered charge, can be filed only by the borrowing company, and not by the creditor concerned. The application, for the registration of the charge, along with the relevant documents, must be filed with the egistrar of ompanies within the stipulated time, and it is not necessary that it should be actually recorded and registered by the egistrar of ompanies in his books, and/or a certificate of such registration must be issued by the egistrar of ompanies, within such stipulated time itself. Just the act of filing, within the stipulated ( time, is good enough. days)

Such application, along with the copies of the relative documents creating the charge, along with the brief particulars thereof, is to be submitted on Form-8, in triplicate. [It may, however, be pertinent to mention here that the application for the modification of the charge, or the satisfaction of the charge, is required to be submitted on Form-10 and Form-17, respectively, in triplicate].

The date of the execution of a charge (i.e. the date of the signing of the relative documents) is the date of creation of the charge, for the purpose of computing the time for its registration. If the charge has been executed earlier to another charge, but had been got registered afterwards, (of course, within the prescribed time limit of 30 days), such a charge (executed earlier) will have the priority over the other; it having been registered subsequently, notwithstanding.

Before granting any advance to a Company, against the charge of pledge or hypothecation, the banks and other creditors first undertake a thorough search in the office of the Registrar of Companies. Further, after the bank and the other creditors, and the borrower, execute the necessary hypothecation documents, such documents are promptly submitted to the office of the Registrar of Companies concerned, for the purpose of the registration of the charge in his books.

This is a must, inasmuch as such registration is deemed to be a due public notice and, thus, any subsequent charge, on the goods concerned, even by way of pledge, will not have any priority, or preference, over such hypothecation charge. While the charges by way of pledge and hypothecation are created in respect of movable goods or items only, the charge in regard to immovable property (land and building) or even immovable items of plants and machinery are required to be created necessarily by way of mortgage only.

Debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the companys assets or not. As described by Chitty, J., debenture means a document, which either creates a debt or acknowledges it , and any document which fulfils either of those conditions is a debenture. Palmer describes the debenture as any instrument under seal, evidencing a deed, the essence of it being the admission of indebtedness.

Main characteristic features of a debenture: (a) It is issued by a company and it is in the form of a certificate of indebtedness. (b) It generally specifies the date of its redemption (repayment). It also provides for the repayment of the amount of the principal and interest, at the specified date, or on the dates on which each instalment will be payable. (c) It generally creates a charge on the assets of the company or the undertakings of the company. Generally, the term pari passu is written in the terms and conditions of debentures.

A company, instead of issuing separate debentures individually to the debenture holders, evidencing separate and distinct debts, may create one consolidated loan fund known as the debenture stock. Such debenture stock is divisible among a class of lenders, each of whom is given a debenture stock certificate, each evidencing a part of the whole loan to which he is entitled to receive the repayment.

Debenture holders are the companys creditors Besides, company has the legal obligation to pay the amount of interest at the specified rate, and on the specified time, and redeem the debentures on the due date(s). But, a company has no such legal obligation, to pay the dividends on its shares, both equity and preference.

Like equity and preference shares, debentures can as well be issued by way of: (i) Public Issue (ii) Private Placement (iii) Rights Basis

There are, generally, three main types of debentures on the basis of their convertibility (or otherwise) into equity shares. They are: (a) Fully Convertible Debentures (FCDs) (b) Partly Convertible Debentures (PCDs) (c) Non-Convertible Debentures (NCDs)

Salient Features of Debentures: (a)Security Debentures are usually issued against the security of the charge created by way of an equitable mortgage of the companys immovable properties, both present and future. (b) Trustee At the time of the issuance of the debentures, a trustee is appointed, by executing a Trust Deed, with a view to safeguarding the interests of the debenture holders, and ensuring that the investors may get the amount of interest periodically and regularly, and on time, and that the principal amount, too, is duly paid as and when it may fall due. Generally, the Commercial Banks, Insurance Companies or Financial Institutions are appointed as the trustee and a mention to this effect is also made in the issue documents.

Salient Features of Debentures: c) Debenture Redemption Reserve (DRR) With a view to further safeguarding the interest of the general public, investing in the debentures, the companies are required to create a Debenture Redemption Reserve, too, with at least 50% of the amount of the issue, before the process of redemption actually commences. This, however, is required to be done only if the maturity period of the debenture happens to be more than 18 months.

Salient Features of Debentures: (d) Rate of Interest (or Coupon Rate) Debentures are usually issued at fixed pre-determined rate of interest, which is also referred to as the coupon In some cases, the coupon rate may be nil, too. (e) Floating Interest (Coupon) Rate In some cases, it may be kept floating, periodically rising and falling with some other benchmark rate, like the Bank Rate, State Bank Advance Rate, or a certain percentage higher than the Banks highest term deposit rate, etc.

Salient Features of Debentures: (f) Period of Maturity A company, as of now, is completely free to stipulate any maturity (redemption) period. (g) Optional Convertibility Some companies issue debentures with the provision that these could be converted into shares, after the expiry of a specified period and in the pre-specified ratio, as stated in the issue documents, but at the sole option of the debenture holders.

A public issue of debentures involves a large number of debenture holders, and all those who subscribe to the issue are the creditors of the company. Accordingly, it is not possible for them to get a separate charge registered with the Registrar of Companies for every debenture holder separately.

Therefore, the most common, convenient and feasible method of securing them all is to execute a trust deed, conveying the property of the company to the trustees and declaring a trust in favour of the debenture holders. A trust deed normally grants the trustees a fixed charge over the companys freehold and leasehold properties, and a floating charge over the rest of the property of the company. Such trust deed contains the terms and conditions, endorsed on the debenture certificates and specifies the rights of the debenture holders and the company.

Powers Given to the Trustees in Trust Deed (a) To take a mortgage over the companys property. This way, the title deeds in respect of such mortgaged property are transferred to them (morgagees) and the company is thereafter prevented from creating any further charge over them (properties), ranking in priority to the debentures. (b) To sell or lease the property and to renew the leases. (c) To exchange the mortgaged property for any other suitable property.

Powers Given to the Trustees in Trust Deed (d) To modify the subsisting (existing) contracts applying to any part of the property. To compromise claims. To commence and defend actions. To appoint a receiver on the security becoming enforceable.

(e) (f) (g)

Advantages of Debenture Trust Deed


(a) Trustees watch the interest of the debenture holders. Trustee are bound to act honestly and with due care and diligence. (b) Trustees have a legal mortgage over the companys property, such that the persons, who subsequently lend money to the company, cannot gain priority over the debenture holders. (c) If and when the company makes a default in this regard, the trustees can take action for enforcing the security on behalf of the debenture holders. (d) The trustees can ensure that the property charged is kept insured and properly maintained, as it would not be possible for a large and fluctuating body of the debenture holders to do so.

Appointment of Debenture Trustees [Section 117B] A company, before the issue of a prospectus or a letter of offer to the public for subscription of its debentures is required to fulfill the following conditions: (a)To appoint one or more debenture trustees for such debentures to protect the interest of the debenture holders, and (b)To write on the face of the prospectus or a letter of offer that the debenture trustees have given their consent to be appointed as the debenture trustees.

Debenture Redemption Reserve (DRR) As per the Companies (Amendment) Act 000, the company is required to create a Debenture Redemption Reserve (DRR) for the redemption (repayment) of such debentures as and when these may fall due. For this purpose, the company shall credit to the DRR account sufficient amounts from out of the profit every, year till such time the debentures are fully redeemed. Further the DRR accounts shall be utilised by the company only and exclusively for this purpose (i.e. for the timely redemption of the debentures periodically).

Failure to Redeem the Debentures If a company fails to redeem the debentures on the due date(s), any or all the debenture holders can make and application to the Company Law Board (CLB). The Company Law Board (CLB), in turn, after hearing the parties concerned, may direct the company by its order to redeem its debentures forthwith by paying the amount of the principal and interest due thereon.

Remedies for Secured Debenture-holders Secured debenture holder (i.e. where the trust deed has been executed) enjoy rights: (i) To sue the company for the repayment of the principal and interest on their debentures, and (ii) To file an application in the court for the winding up of the company.

Remedies for Secured Debenture-holders (A) Sale of Assets

Usually, one of the express terms and conditions of the debentures or the debenture trust deed is that the trustees have the powers of sale of the property charged against the secured debentures. However, if no such power is given in the debentures or the debenture trust deed, an application may be filed in the Court for an order to sell the property of the company for the purpose of repayments of the debentures.

Rights of an Unsecured Debenture Holder

A company can issue Unsecured Rights Debentures, for the maturity period of upto 18 months, without any security charged there-against. Thus, the security charged against the secured debentures cannot be accounted for the discharge (repayment) of such unsecured debentures.

Rights of an Unsecured Debenture Holder

But then, the unsecured debenture holder, has the right: (i) To sue the company for the repayment of the principal and interest on the debentures, and (ii) To file an application in the court for the winding up of the company, and prove his debt as the unsecured creditors of the company.

Remedies for Secured Debenture-holders (B) Foreclosure

The trustees may file an application in the Court for an order of foreclosure. The effect of such order of foreclosure will be that the borrowers interest in the assets charged is completely extinguished the lenders become the owners of those property. But for filing an application of foreclosure, it is necessary that all the debenture holders of the class concerned join hands [Wallace vs. Evershed, (1 99) 1 Ch. 9].

Remedies for Secured Debenture-holders (C) Appointment of a Receiver

In the cases where there is a trust deed, it (trust deed) usually provides that the trustees may appoint a Receiver. If no such power is given, an application may be filed in the Court in the debenture action to appoint a Receiver. On appointment of a Receiver, the assets become specifically charged in favour of the debenture holders, and the power of the company to deal with these properties in the ordinary course of business comes to an end. However, the company continues to exist till the time it is wound up.

Where no trust deed has been executed, in favour of the debenture holders, a debenture holder may, on default in the payment of principal or interest, bring an action (referred to as the debenture holders action) on behalf of himself as also on behalf of the other debenture holders of the same class ,praying for the following remedies: (a) A declaration to the effect that the debentures have a charge on the assets of the company, (b) An account of what the company owes (is required to repay) to the shareholders; the amount of assets ; prior claims; and so on, (c) An order of foreclosure or sale, and (d) The appointment of a Receiver.

If a debenture holder owes a debt to the company, which is insolvent; the debenture holder cannot set off his debt against the liability he owes to the company. The rule is that, a person who claims a share in the funds, must first repay every thing he owes to the fund, before he can claim a share in the fund. All invests made by a company on its behalf must be made in its own name. However, there are certain exceptions made to this rule.

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